The Great Turn

I was born on this day, 59 years ago, and a lot has changed since then for me personally and for the world we live in.

My parents are gone now, but Elisabeth is always by my side, and has been since 1969.

Our only son, Anthony, is back from college. After majoring in computer science and then in Japanese language, he wants to be a fiction writer.

We dont have any grandchildren. But our nephews children, Julia, Tiago and Arthur, are wonderful stand-ins.

Now, what concerns me most about the future of their generation and ours as well is how little most people save for education, health care, retirement and, alas, for unexpected disasters.

No Rainy-Day Money
for Hurricane Katrina

Were witnessing this right now, in the aftermath of Hurricane Katrina. Our federal government has pledged, or promised to pledge, at least $200 billion for the recovery effort.

But as a nation, we simply dont have the money.

And ironically, where to FIND the money isnt even a partisan issue. Its a debate thats raging primarily between …

(a) free spending politicians, whether Republicans or Democrats and …

(b) fiscal conservatives, also regardless of party affiliation.

The fiscal conservatives are the minority in Congress and the White House. They want to finance the Katrina recovery by raising taxes, cutting other programs, or some combination of both.

The free spenders, meanwhile, are the majority. They want to just spend the $200 billion now and worry about where to get the money some other day.

But this dilemma is not a new one. It stems from many decades of unbridled spending and dwindling savings.

Indeed, until the late 1980s, the average American household saved from 8 to 11 cents out of ever dollar of disposable income.

But starting in the early 1990s, Americas personal savings rate suffered a great plunge.

In 1993, when it fell below 6 cents on the dollar for the year, it should have raised eyebrows, but didnt.

In 1997, when it plunged below 4, it should have set off alarm bells, but, again, few people paid much attention.

Now, however, the savings crisis is coming to a head; it simply cannot be ignored any longer.

In July of this year, just weeks before America suffered its worst natural disaster in history, Americas savings for a rainy day was actually less than nothing: The rate fell to a NEGATIVE 0.6%, the lowest level on record.

This means that, after paying their taxes, Americans didnt even have enough income to cover their spending for the month. So they had to dip into their already-meager savings to make up for the shortfall. And that was BEFORE the surge in national gasoline prices to $3 per gallon in the wake of the storm.

If this were just a monthly fluke, it might be forgivable. But in the first seven months of 2005 through July, the average savings rate for the year so far has also fallen to its lowest level in history 0.2%.

Two meager pennies out of every $10 earned!

Businesses and governments are also saving less than ever. And this is not exclusively an American phenomenon. We see the same pattern of declining savings in developing countries … in Western Europe … and even in Japan, where savings use to be a national passion.

The Worst Savings
Crisis in the World

Amazingly, but not coincidentally, the most distressing savings crisis in the industrial world is right here in the United States, precisely the country that has enjoyed the most lasting economic prosperity.

In 1946, the year I was born, it was the opposite. United States had accumulated an unprecedented stockpile of pent-up savings. American families had virtually no debt. Credit cards didnt exist. Even home mortgages were relatively rare.

Today, in contrast, despite all our power and apparent wealth, were flat broke and deep in debt personally, nationally and internationally.

In 1946, the nations savings was the source of abundant capital to finance the greatest half century of growth in the history of the planet.

Today, that source of capital is gone.

In 1946, the future was an open horizon and a clear sky, with virtually unlimited economic potential. Today, the future is a steep cliff blocking most attempts we might make to forge ahead.

We need a break, a time to stop, consolidate and regroup to be able to work harder and save more. But Washington and Wall Street dont want to stop. They want to push forward at any cost.

Thats why the federal government cut taxes. Thats why, despite its recent rate hikes, the Federal Reserve has kept short-term interest rates BELOW the rate of consumer price inflation. And thats why the president says he wants to rebuild the Gulf Coast with money we dont have.

This is not a trivial matter. It has far-reaching consequences for your investment portfolio and your familys entire financial future …

Consequence #1
The Worst Inflation
in a Quarter Century

When the government pumps up an economy with moderate debt and plenty of savings, it can help bring on more prosperity. But when the government tries to pump up an economy thats loaded with debt and devoid of savings, the more likely result is more inflation.

Thats precisely whats happening in this country right here and now:

The consumer price inflation announced by the government last week was the worst since early 2001.

But its actually a lot worse than it seems, for three reasons:

First, the inflation Im talking about is not just for one month. Its the accumulated inflation over an entire year, indicating a long-term trend.

Second, a lot of the inflation is hidden by serious, known distortions in the governments consumer price data. Theyre actually assuming the cost of housing has not been going up, which everyone knows is false.

Third, the inflation weve seen so far is through the end of August, BEFORE the inflationary impacts of Hurricane Katrina. And those impacts are likely to strike in two phases the immediate impact of rising fuel costs in phase one, plus the long-term impact of massive deficit spending in phase two.

If you factor in the surging cost of housing and the upcoming inflationary surge in the wake of Hurricane Katrina, you cant escape the conclusion that …

The inflation rate this year and next are likely to be the worst in a quarter century.

You cant see this yet in the numbers. But a growing minority of smart investors can already smell it.

They can sense the enormity of the inflationary crisis now ahead. They are acting on their instincts. And they are causing a GREAT TURN in all the financial markets.

For example, consider:

Consequence #2
The Highest Gold
Prices in Nearly Two Decades

Gold investors are among the first to see the dangers of inflation and act accordingly.

Thats why gold is widely accepted as a leading indicator of inflation.

And thats why, last week, we showed you how gold had broken through three critical barriers.

Sure enough, now the yellow metal has just surged to its highest level in nearly two decades, opening the path for a run-away move to $500 and beyond.

Gold shares, meanwhile, are surging at an even faster clip. Royal Gold, for example, the stock Ive been recommending here in Money and Markets, is absolutely on fire. Last week, I told you how it had surged by a whopping 41% just since August 30th. Well, on Friday, it jumped ANOTHER 6.2%.

My recommendation: If you already own some gold shares, hold on tight. If not, buy on a dip, which could come at almost any time.

Consequence #3
A New Surge in Oil on
the Immediate Horizon

Oil prices slipped some more late last week, but oil STOCKS did precisely the opposite.

Clearly, investors see the oil price correction as a great investment opportunity. And they see that its driven almost entirely by temporary, artificial measures by world leaders in a desperate attempt to contain the price explosion. So while governments are selling, theyre buying.

Thats why Enerplus (ERF), the Canadian Royalty Trust Ive been recommending here from the outset, reached an all-time, new high on Friday.

And thats why the OIL Service HOLDRS (OIH), the exchange-traded fund thats been in the vanguard of the energy sector, also turned higher toward the end of the week, even as oil prices continued to slip.

This is good news for anyone who holds their shares and great news for those who hold their options. If youre among them, stand pat.

But if youre still on the sidelines, dont wait any longer. The new inflation numbers that came out last week … the new surge in gold … and the relative strength in the oil shares … are all sending you the signal that the time window for getting on board is closing quickly.

My recommendation: If you have risk funds available, consider Larrys Energy Options Alert, which will soon be closing to new members. (For more information, call 1-877-719-3477.)

Consequence #4
Long-Term Interest
Rates Finally Rising

Gold investors arent the only ones that see the inflationary storm clouds. Bond investors, whose assets are the first to be hurt, are also sensing the dangers and beginning to run for cover.

Strangely, for the past 16 months, although inflation and interest rates were gradually rising, the yields on long-term bonds were actually going down.

Apparently, bond investors didnt believe the Fed was serious about raising interest rates. Nor did they expect the kind of inflation that were seeing now. So they were content to hold on to their bonds or even buy more.

Now, though, theyre attitude is changing. And now, Treasury bond yields are turning sharply higher. Just like the price of crude oil did a few years ago … and just as gold has done in the past few weeks …Treasury-bond yields have now hit bottom, bounced back, and broken out of their downward trend.

Its not much of a move yet. But its come at a critical time, and its happening in a very convincing manner.

My recommendation: Avoid all long-term bonds. Keep ALL of your cash short term.

One Last Thought

In my family, savings and investments are naturally important to us. But even more important is our health.

Nobodys perfect, and Elisabeth and I have also digressed from time to time. But we are fortunate to have had parents who taught us the fundamental principles of healthy living, and we have adhered to them to the best of our ability.

We hope you can do the same, in a small or big way.

And no matter what crisis may lie ahead, rest assured that I will continue to do my utmost to guide you along the way, for many years to come.

Good luck and God bless!

Martin

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.